‘Peanut butter’ pay raises are not yet mainstream, Mercer finds

Employers awarded mean merit increases of 3.1%, slightly below the 3.2% projection in October, while average total increases came in at 3.4% versus 3.5% expected. Only 4% of employers used equal across-the-board raises, with most still relying on merit and market-based pay structures. Sector variation was limited, though high tech led total pay increases at 3.6% and healthcare services averaged 3.0% merit and 3.3% total increases.

Analysis

Wage budgets are effectively normalizing rather than re-accelerating, which matters more for margins than the small miss versus prior projections. The second-order read-through is that labor cost inflation is still sticky enough to prevent broad operating leverage, but not hot enough to force a re-rate in cyclical wage-sensitive businesses. That is a mixed setup for equities: employers keep pricing discipline on raises, while employees increasingly experience real wage compression if inflation stays near current levels.

The most important signal is the dispersion between formal pay structures and the growing interest in equal raises. Even if “peanut butter” raises are not yet mainstream, the fact that more companies are considering them suggests management is optimizing for retention simplicity over performance differentiation. That tends to flatten internal productivity dispersion over time, which is negative for high-growth firms that depend on merit-based talent allocation and positive for labor-intensive operators that value predictability over upside pay leakage.

Sector differences are too narrow to justify aggressive single-industry positioning, but the relative ranking still matters at the margin. Higher total increases in high tech imply continued wage pressure in software and IT services, while sub-3% total increases in chemicals and manufacturing indicate less immediate labor cost stress and more room for margin recovery if demand stabilizes. Healthcare’s move out of the bottom quartile is notable because it suggests the long-running wage catch-up in services is still in progress, a headwind for providers with thin reimbursement flexibility.

The contrarian point is that the market may be underestimating how much pay philosophy itself changes after a prolonged period of macro uncertainty. If flat raises gain share, it is usually because management is signaling weaker conviction in differentiated growth and a desire to protect cash, which can be a late-cycle tell for labor-demand cooling. That makes the data more useful as a forward indicator for employment softness over 2-4 quarters than as an immediate catalyst for broad labor-cost relief.

Key Decisions for Investors

• Underweight labor-intensive healthcare services and staffing-adjacent names over the next 1-2 quarters; use any strength to reduce exposure, as the move away from the bottom of the pay distribution suggests reimbursement pressure is not easing enough to offset wage normalization.
• Long industrial and chemical names with operating leverage to easing wage pressure, especially where labor is a high fixed-cost component; target a 3-6 month horizon for margin expansion if volume holds and compensation growth stays near 3%.
• Pair trade: short high-multiple high-tech/software equities vs long select manufacturing/chemicals beneficiaries for 3-6 months; the thesis is that tech still faces the tightest labor market and highest retention premium, while non-tech cyclicals get better cost stability.
• Buy downside protection on firms with visible employee-heavy cost structures into next earnings season; if merit budgets continue drifting down, consensus may have to revise labor expense assumptions, but a rebound in inflation or a sharp labor re-acceleration would invalidate the trade.
• Monitor management commentary for increased use of across-the-board raises as a bear signal on growth confidence; if adoption expands materially over the next two compensation cycles, reduce exposure to firms where human capital differentiation is a core moat.